Question

Rolland has given Forrest the following information regarding the AMMS investment for a financial analysis: Projected useful life 10 years Purchase/installation $4,400,000 Increased working capital needed 1,000,000 Increased annual process engineering costs over current costs 200,000 Reduction in annual manufacturing costs over current costs 400,000 Reduction in annual maintenance costs over current costs 300,000 Increase in annual sales revenue 700,000 Estimated cash disposal price at end of useful life 850,000 Estimated recovery of working capital at end of useful life 1,000,000 IDI uses straight-line depreciation for all its equipment assuming a zero salvage value. Currently, the forklift trucks have a net book value of $480,000 with a remaining useful life of 8 years and a zero salvage value for depreciation purposes. If IDI purchases AMMS now, it can sell the forklift trucks for $100,000. To make the 10-year project life of AMMS comparable to that of the forklift alternative, Forrest estimates that if IDI does not buy the AMMS, the company will have to lease new forklift trucks for the Western Plant for years 9 and 10 at a cost of $80,000 each year. IDI has a 40% tax rate and requires a 12% after-tax rate of return on this project. Assume that tax effects and cash flows from equipment acquisition and disposal occur at the time of the transaction and that tax effects and cash flows from operations occur at the end of each year.

          Rolland has given Forrest the following information regarding the AMMS
investment for a financial analysis:
Projected useful life	10 years
Purchase/installation	$4,400,000
Increased working capital needed	1,000,000
Increased annual process engineering costs over current costs	200,000
Reduction in annual manufacturing costs over current costs	400,000
Reduction in annual maintenance costs over current costs	300,000
Increase in annual sales revenue	700,000
Estimated cash disposal price at end of useful life	850,000
Estimated recovery of working capital at end of useful life	1,000,000
IDI uses straight-line depreciation for all its equipment assuming a zero salvage value.
Currently, the forklift trucks have a net book value of $480,000 with a remaining useful
life of 8 years and a zero salvage value for depreciation purposes. If IDI purchases
AMMS now, it can sell the forklift trucks for $100,000. To make the 10-year project
life of AMMS comparable to that of the forklift alternative, Forrest estimates that if IDI
does not buy the AMMS, the company will have to lease new forklift trucks for the
Western Plant for years 9 and 10 at a cost of $80,000 each year.
IDI has a 40% tax rate and requires a 12% after-tax rate of return on this project.
Assume that tax effects and cash flows from equipment acquisition and disposal occur
at the time of the transaction and that tax effects and cash flows from operations occur
at the end of each year.

Rolland has given Forrest the following information regarding the AMMS
investment for a financial analysis:
Projected useful life 10 years
Purchase/installation 4,400,000
Increased working capital needed 1,000,000
Increased annual process engineering costs over current costs 200,000
Reduction in annual manufacturing costs over current costs 400,000
Reduction in annual maintenance costs over current costs 300,000
Increase in annual sales revenue 700,000
Estimated cash disposal price at end of useful life 850,000
Estimated recovery of working capital at end of useful life 1,000,000
IDI uses straight-line depreciation for all its equipment assuming a zero salvage value.
Currently, the forklift trucks have a net book value of480,000 with a remaining useful
life of 8 years and a zero salvage value for depreciation purposes. If IDI purchases
AMMS now, it can sell the forklift trucks for 100,000. To make the 10-year project
life of AMMS comparable to that of the forklift alternative, Forrest estimates that if IDI
does not buy the AMMS, the company will have to lease new forklift trucks for the
Western Plant for years 9 and 10 at a cost of80,000 each year.
IDI has a 40% tax rate and requires a 12% after-tax rate of return on this project.
Assume that tax effects and cash flows from equipment acquisition and disposal occur
at the time of the transaction and that tax effects and cash flows from operations occur
at the end of each year.

Added by Deborah M.

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